Business Page – June 4, 2000

On
the Line: Demerara Distillers Limited – Annual Report 1999

Introduction

As
part of its commitment to inform the public of financial issues in
Guyana Business Page reviews the Annual Reports of public companies as
they become available. As a matter of policy the review is done after
the Report has been presented to the members at the Annual General
Meeting and addresses only information made available to the public.

Today, Business Page
reviews the Annual Report of Demerara Distillers Limited, one of the
country’s leading public companies with its shareholding fairly
widespread. This is unlike Demtoco, NBIC and GBTI whose shares are
publicly tradable but which each has a significant shareholder with a
controlling interest. The Report was presented to the members of the
company on May 31, 2000 at the National Cultural Centre.

The
Company

DDL is both an operating as well as a group parent company
i.e. it has a controlling interest in other companies. There are eight
wholly owned subsidiaries, one that is 95% owned and one in which it has
a 40% stake. Four of these companies are overseas based,two in the Caribbean and two in Europe. The company also has
interlocking directorships with the hugely successful Demerara Bank
Limited and GA 2000 of which the indefatigable Mr. Yesu Persaud is also
Chairman.

The
activities of the companies include rum manufacturing, shipping,
construction, food processing and distribution. Unfortunately the Report
does not present information on these companies in a comprehensive or
consistent manner to allow for a proper evaluation of their performance.
By way of example the Chairman’s Report in discussing the performance
of the subsidiaries included such comments as:

Topco:Sales
grew by 76%. No comment on profit or profitability

Demerara Shipping:
Pre-tax profit was $82.9M, a decline of 19.6% with no comment on sales.

Distribution Services Limited:
“DSL had a satisfactory year and improved its profit before tax by
19.6% on the previous year.” No indication of the dollar value of the
pre-tax profit or sales.

CSR (St. Kitts) Limited:
“The company made a marginal profit.” What this means is patently
unclear.

Superior Distribution Limited (Trinidad): ‘The company is expected
to make a profit at the end of 2000” Does this mean for the year or
that it will move into profitability by the end of the year?Accounting language must be more precise so as not to lead to
different interpretation.

European Subsidiaries: “The
pre-tax profit for the year was $46.2M compared with $115.2M” Again no
mention of sales volume or value.

This
imprecise presentation may have been deliberate to avoid apparent
repetition but its consequences with regard to information content seem
to be much worse. The company is not only a business leader but has
three of the country’s top accountants as Executive Directors. The
contents of the Annual Report can and indeed should be improved.

Financial
Highlights

In
this review we focus on the Company rather than the Group since we do
not consider that the Report provides sufficient information to allow
any intelligent review of the Group.

The
Chairman Mr. Yesu Persaud in his Report indicated that the performance
of the company was affected by the 8 week strike by public service
workers including customs officers which effectively prevented shipments
from entering and leaving Guyana.He
also referred to the negative impact of low commodity prices and the
weakness of the Euro on European exports. In order to achieve
significant savings on overhead costs it was decided to combine
Distilleries operations in one location at Diamond. Below are some of
the financial highlights of the company:

Financial
Statement Snapshot

1999

1998

% Change

Total
Assets

5,532,467

5,058,430

+9

Total
Liabilities

1,287,440

1,269,770

+14

Deferred
Tax

118,287

112,729

+5

Shareholders’
Funds

4,126,740

3,675,931

+12

Net
Income before Taxation

887,356

862,505

+3

Net
Income after Tax

624,059

513,669

+21

Earnings
per Share (in Dollars)

1.62

1.33

+22

After
tax return onshareholders’ fund

15.12%

11.25%

+34

Return
on Gross Assets after

11.28%

10.15%

+11

Profitability

Total revenues
increased by 16%, from G$4.93Bn in 1998 to G$5.0Bn. or 1.6%. Given the
difficult circumstances in the Chairman’s report the results are
understandable even though if inflation is taken into account there is a
real decline in the turnover.

Income before
taxation and interest increased from 18.4% of turnover in 1998 to 19.3%
in 1999 but net interest cost increased from $45M to $80M with the
result that net profit before tax increased only marginally from 17.5%
to 17.7%. The tax charge declined from $349M. to $262M. or from an
effective rate of 40.5% to 29.7%. As Note 5 indicates the major change
is in relation to Deferred Taxation, a form of tax equalisation, which
had a charge of only $5.6M. in 1999 compared with $112M. in 1998.

After-tax profit
reflected a 21% increase over 1998.The after-tax return on shareholders funds, which reflects the
efficient use of the shareholders’ funds in the production of income,
was 15.12%, an increase of 34% over 1998.The after-tax return on assets was 11.28% as compared with
10.15% in 1998. The Company’s Annual Report uses the acceptable method
of pre-tax return on profits and assets but since any return to
shareholders would be after payment of taxes, the usefulness of such a
measure is questionable.

Balance
Sheet

There
has only been a 3.5% change in the book value of the company’s net
assets but this is due largely to a depreciation charge of $162M which
masks investments of $232M. during the year. The directors have approved
a further $500M.capital expenditure but which has not been contracted
for. There is no indication in the financial statements or in the
reports of the Chairman or the Managing Director how the expenditure
will be financed.

There
were no further investments in subsidiary or associated companies during
the year and investments therein remain at $125M. The directors should
be becoming increasingly concerned at the rising level of indebtedness
of the subsidiaries to the parent company. In 1997 this figure was
$647M. increasing to $754m. in 1998 and in 1999 the figure is $1.001B.
It appears that some of the subsidiaries are undercapitalised and that
they may not be able to respond positively to any demand from DDL for a
liquidation of the amount owed by them. It is probable that classifying
these balances as current meaning that they are likely to be turned into
cash within twelve months is not a conservative position. Any concerned
shareholder should be asking why this level of support and how those
funds are actually used by the subsidiaries.

As
mentioned earlier the Chairman in his report indicated that the European
markets are experiencing problems. The Company’s experience in India
and the lackluster performance of the St. Kitts operation evidence the
high risks involved in some areas of international operations. This in
turn suggests that while the growth hinges on expansion into other
markets more exhaustive investigations need to be carried out in the
regulatory and marketing aspects of those countries.

Management

While
this company has achieved remarkable success over a relatively short
period of time – the Annual Report speaks of a “legendary level of
creativity” shown by the management of the company- the Annual Report
does not discuss the issue of governance in any way. Stock Exchanges and
shareholders increasingly expect disclosure over and above the bare
minimum required by the law. It is now mandatory in several countries to
have rules which aim to prevent abuse by the management including
executive directors. Some of these mechanisms include audit committees
and compensation committees on which independent directors should form a
majority. The Report does not indicate whether there exist such
committees in the company.

Conclusion

Given the
difficulties experienced by the country in 1999, the results have to be
considered satisfactory. There is a good balance between executive and
non-executive directors although there is only one woman among the ten
directors. Alcoholism is a serious social problem in Guyana and it would
have been useful for the report to disclose how the Company promotes the
responsible use of its principal product. Chairman Persaud continues his
campaign for responsible conduct by our politicians. He could have said
that unless this is demonstrated fairly urgently, the future of both the
country and that of the Company will be in doubt.